Analysts: Netflix value – hype, logic or passion?

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A research paper – Netflix: A Clash of Heart vs. Mind – from analysts at MoffettNathanson (MN) dissects the current value of Netflix and states that the MN team is finding Netflix the single most frustrating stock to cover.

“We have continually failed to remember what makes great growth stocks and instead have ‘wasted’ our time analysing free cash flow, cost growth, valuation and industrial changes that will impact the long-term competitiveness of the marketplace,” says the investment analyst firm. “As such, given the singular focus on subscribers as the measurement tool for investors, the fact that Netflix was up an astonishing +54% in the first quarter is proof that all great growth stocks need two things: a narrative and investors that believe that narrative.”

“However, at some point, a stock’s valuation reflects all of the positives in the world and none of the risks. For proof of that point, all you have to do is look up the recent action in TSLA. This note attempts to do many things: update our subscriber numbers for 2018 and beyond, explore the operating leverage (or lack thereof) in Netflix’s cost structure, and embrace alternative ways to value Netflix,” MN advises.

The first thing MN has done is to raise its price target for Netflix to an impressive $213 (€173) per share (up $40), but this is a poor substitute for Netflix’s actual $280-ish current value, and with next-to-no signs of buyer sentiment evaporating (although it was riding high at $330 just a month ago). Netflix’s market capitalisation is currently a mind-blowing $119 billion.

The bottom line, for many observers, is that all the signs are in place for further upward movement for Netflix. The market seems to love its output, with zero commercial breaks let alone ‘on demand’ satisfaction. It also seems that Netflix (and to a certain extent Amazon Prime) has a significant commitment towards UHD, and Netflix fans who have shelled out for new 4K-enabled TV receivers cannot get enough of their output. Moreover, an extra $1 a month is not going to harm these viewers (last week Netflix raised its price in Colombia, from $8.16 to $8.90 a month. UHD price rose to $10.30).

MN points out that Netflix is wisely expanding right into cable and satellite’s core subscriber base, making it easier than ever for anyone with a hard wire connection (DSL, cable or fibre) to download content. Add in 5G wireless access still to come, and the audience can only grow.

MN suggests that these new penetration opportunities could give Netflix up to 85 per cent access or four-to-five years of roughly 5 million net subs per annum in the US alone. MN says that this year’s subs net (global) additions might easily accelerate to 22 million and take the International audience to close to 80 million.

In the UK, Netflix now has a steadily rising subscriber base (at 8.15 million as at December 31st) and no sign of slackening off. Sky is rightly concerned.


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